Methods and computer software applications for selecting securities for an investment portfolio

ABSTRACT

Provided are methods and computer software applications for generating a stock portfolio, and/or enhanced stock index, through using a plurality of growth factors and a plurality of value factors to rank stocks, and for constructing investment vehicles based on the stock portfolio. The method, software application, or computer apparatus of the present technology employs a novel stock selection strategy to select stocks from a pre-selected universe of securities such as a commercially available stock market index in order to create a stock portfolio, and/or enhanced stock index, and a fund based thereon that can generate positive alpha as compared to a fund based on the pre-selected universe of securities.

RELATED APPLICATIONS

This application is a continuation of, and claims priority to, U.S.application Ser. No. 13/188,871, filed Jul. 22, 2011, which is acontinuation of, and claims priority to, U.S. application Ser. No.12/106,672, filed Apr. 21, 2008, now U.S. Pat. No. 7,987,130, whichclaims priority to U.S. Provisional Application Ser. No. 60/912,918,filed Apr. 19, 2007, the content of all of which is incorporated hereinby reference in their entirety.

BACKGROUND OF THE INVENTION

The invention relates to portfolio construction and management, and morespecifically, relates to methods and computer software applications forselecting and weighting securities in order to construct an investmentportfolio, or an enhanced stock market index. The portfolio can be usedto create a closed-end fund, a traditional mutual fund, a separatelymanaged account, a unit investment trust or an exchange-traded fund(ETF). Additionally, an enhanced index may be used as the basis for anindex tracking fund.

Professional investment managers often follow predetermined investmentdecision-making criteria or strategies for selecting the stocks for theportfolio. While the investment philosophies that inform stock selectionstrategies differ significantly, the strategies generally have two keyinherent qualities:

1. Sound Analysis: The strategy seeks to out-perform specified indicesby selecting portfolios by evaluating relevant, sound, fundamental andtechnical information that can reasonably be expected to be material tofuture returns. The spirit of this quality is captured by this quotefrom Benjamin Graham, mentor to legendary investor Warren Buffett:

-   -   The individual investor should act consistently as an investor        and not as a speculator. This means that he should be able to        justify every purchase he makes and each price he pays by        impersonal, objective reasoning that satisfies him that he is        getting more than his money's worth for his purchase.

2. Discipline: A rational investment decision-making process determineswhich stocks are chosen for the portfolio; emotional judgments should beavoided. Warren Buffett' s words exhort investors to be mindful ofirrational tendencies of human nature:

-   -   Investors should remember that excitement and expenses are their        enemies. And if they insist on trying to time their        participation in equities, they should try to be fearful when        others are greedy and greedy when others are fearful.

Developing a strategy that robustly meets these criteria can be verydifficult, if not elusive. The best of intentions are often thwartedbecause the stock market is subject to waves of optimism and pessimism.Fear and greed affect the market. Once again, Benjamin Graham states:

-   -   Most of the time common stocks are subject to irrational and        excessive price fluctuations in both directions as the        consequence of the ingrained tendency of most people to        speculate or gamble give way to hope, fear and greed.

In addition to greed and fear, which call the discipline of theinvestment process into question, various other behavorial biases canimpede the other pillar of quality investment decision-making, soundanalysis. One example is the “affect” bias, described here by prominentsocial psychologist Robert Zajonc:

-   -   We sometimes delude ourselves that we proceed in a rational        manner and weigh all the pros and cons of the various        alternatives. But this is rarely the case. Quite often “I        decided in favor of X” is no more than “I liked X.” We buy the        cars we “like,” choose the jobs and houses we find “attractive,”        and then justify these choices by various reasons.        This bias can result in the tendency to irrationally favor        stocks with more familiar names in glamorous industries like        fashion or technology and eschew boring industries like paper or        chemical processing. Other examples are “overconfidence” where        decision makers are overly confident in their own forecasts and        “conservatism” where investors are reluctant to update their        forecasts in response to new information. Overconfidence results        in investors mistakenly believing that fundamental results such        as earnings will fall into too narrow a possible range of values        around their forecasts. Conservatism will result in investors        being too slow to recognize a change in the direction of the        underlying fundamentals of a firm, overlooking business        turnarounds or steady declines in the face of obvious evidence        of these occurrences.

As discussed earlier, by their nature, human beings have greatdifficulty in selecting portfolios solely on the basis of well-reasonedanalysis in a disciplined non-emotional manner. Objective, quantitativeapproaches based on intuitive financial theory and empirical evidencecan mitigate the shortcomings of the human element in investmentdecision-making. Earlier quantitative investment strategies have beenillustrated in U.S. Pat. No. 5,978,778 issued to O'Shaughnessy on Nov.2, 1999 and U.S. Pat. No. 5,132,899 issued to Fox on Jul. 21, 1992.

SUMMARY OF THE INVENTION

In today's financial marketplace, a well-maintained portfolio is vitalto any investor's success. Sound portfolio construction begins withaligning investment goals to appropriate investment strategies such asasset allocation, diversification, cost control and risk management andapplying periodic portfolio rebalancing.

The present invention provides methods, computer software, and harddrive apparatus, for selecting and weighting securities and creatinginvestment portfolios, including enhanced index funds. The enhancedindex funds (e.g., enhanced ETFs) of the present technology are designedto track the performance of enhanced indices, generated in accordancewith the methods of the present technology.

A rules-based method and computer software application of the presentinvention consistently identifies and selects stocks within a definedmarket segment. The invention identifies stocks within a universe ofsecurities (such as a traditional broad-based index or anotherpredetermined universe) that enable the greatest potential for capitalappreciation. In accordance with at least one embodiment, the method ofthe presently described technology is itself inherently passive. Inaccordance with this embodiment, no active judgment is made when themethod or the computer software application is evaluating stocks, andevery step in the process is driven by a transparent, repeatablequantitative process.

In one aspect, a computer generates a stock portfolio by:

-   (1) receiving into a database, information of all stocks that are    constituents of a pre-selected universe of securities (e.g., a    pre-selected broad-based index), wherein the universe of securities    preferably comprises growth, value, and blend stocks, and wherein    the information includes identity, growth data, and value data of a    stock, as of a selection date;-   (2) scoring each of the stocks using a plurality of growth factors    and a plurality of value factors to generate a growth score and a    value score for each stock;-   (3) determining a selection score and, optionally, a style and/or    sector for each stock, wherein the style of each stock is preferably    either value or growth;-   (4) selecting eligible stocks for a target stock portfolio,    preferably, based on their styles determined in step (3), wherein    only value stocks are eligible for a value stock portfolio, only    growth stocks are eligible for a growth stock portfolio, and all    stocks are eligible for a broad-based “core” stock portfolio;-   (5) ranking the stocks eligible for the target stock portfolio from    the best to the worst selection scores;-   (6) eliminating a pre-determined percentage of the worst ranking    stocks (e.g., the bottom 25%);-   (7) dividing the remaining stocks into a plurality of sub-groups    (e.g., quintiles) based on their rankings; and-   (8) generating the target stock portfolio by weighting the remaining    stocks according to the sub-groups they are in, wherein the    sub-groups (e.g., quintiles) with higher rankings receive more    weight within the target stock portfolio, and each stock is    equally-weighted within its sub-group (e.g., quintile).

To ensure a consistent and accurate representation of the marketsegment, the composition and weights of the stocks in the target stockportfolio are preferably adjusted, reconstituted and/or rebalancedperiodically (e.g., quarterly).

In step (2) above, preferably, each stock initially is given a numericgrowth or value rank for every growth factor and every value factor, andthen all growth ranks of a stock are summed up to generate a numericcombined growth rank of the stock, and all value ranks of the stock aresummed up to generate a numeric combined value rank of the stock. Thecombined growth rank and combined value rank of the stock correspond tothe growth score and the value score of that stock, respectively.Examples of growth factors that can be used to evaluate the stocksinclude, but are not limited to, three month price appreciation, sixmonth price appreciation, 12 month price appreciation, one year salesgrowth, sales-to-price ratio, one year change in return on assets,sustainable growth rate, one year earnings growth, one year cash flowgrowth, market implied earnings surprise, and combinations thereof.Examples of value factors include, but are not limited to, bookvalue-to-price ratio, cash flow-to-price ratio, return on assets,earnings to price ratio, dividend yield, and combinations thereof. Inaccordance with at least one embodiment, growth factors and valuefactors identified in the previous sentences are used to evaluate eachstock in the broad-based index or the applicable universe.

In step (3) above, in accordance with one embodiment of the presentinvention, stocks in the broad-based index or applicable universe arefirst separated into growth, value and blend segments based on value andgrowth style classifications corresponding to the broad-based index orapplicable universe, if they are available. A stock classified by thecorresponding value and growth style classifications solely as a growthstock is given its growth score as the selection score, and isdetermined to be a growth stock. A stock classified by the correspondingvalue and growth style classifications solely as a value stock is givenits value score as the selection score, and is determined to be a valuestock. Blend stocks (i.e., stocks allocated to both the available valueand growth style classifications) are given the better of their twoscores, and determined to be value or growth stocks according to theirbetter scores. For example, a blend stock having a better value scorethan growth score receives the value score as its selection score, andis determined to be a value stock. If no corresponding value and growthstyle classifications are available, then all stocks are given thebetter of the two scores as their selection scores, and designated asvalue or growth stocks according to their better scores.

In step (4) above, in accordance with at least one embodiment of thepresent technology, the stocks are further separated into theirappropriate sectors as determined by the index provider, for example, inthe event of a sector-based portfolio. Then the pre-determinedpercentage of the lowest ranking stocks (e.g., the bottom 25%) in eachsector are eliminated in step (6).

In step (8) above, after the remaining stocks are divided into quintilesin step (7), for example, they can be weighted as follows: the topranked quintile receives 5/15 (33.3%) of the index weight bycapitalization with each successive quintile receiving 4/15 (26.7%),3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), of the index weight,respectively.

The target stock portfolio generated by the method in accordance withone embodiment of the present technology as described above can be usedto construct different investment vehicles such as enhanced index funds,variable annuities, separately managed accounts, ETFs (whether indexbased or managed), and unit investment trusts. An enhanced index canalso be calculated by the method described above. ETFs employing theenhanced method of the present technology are currently available underthe trademark AlphaDEX™. This family of ETFs is advised by First TrustAdvisors L.P., Lisle, Ill.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 is a block diagram of a structure embodiment according to thepresent invention.

FIG. 2 is a schematic flow chart depicting the program flow of asoftware application in the structure of FIG. 1.

DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENT

Various exemplary embodiments of the present invention are discussed indetail below. While specific implementations are discussed, it should beunderstood that this is done for illustration purposes. Other componentsand configurations may be used without departing from the spirit andscope of the present invention.

The presently described embodiments relate generally to portfolioconstruction and management. More specifically, the presently describedembodiments relate to methods and computer software applications forgenerating securities portfolios, and enhanced indices, using aplurality of growth factors and a plurality of value factors to rankstocks. The methods of the present technology employ a novel stockselection strategy to select stocks from a commercially available,preferably, prominent, stock market index or from another pre-selecteduniverse of securities in order to create an investment portfolio (e.g.,one that can be traded as an ETF) that can generate positive alpha ascompared to its benchmark.

As used herein, a stock market “index” is (1) a listing of stockswherein each stock carrying a certain weight of the index forms acomponent of the index and (2) a statistic reflecting the compositevalue of all the components in the index.

As used herein, “alpha” is an indication of how much an investmentoutperforms or underperforms on a risk adjusted basis relative to itsbenchmark. Alpha is a measure of the portion of a return arising fromnon-market risk. For example, if an investment returns more than whatone would expect given the market for the asset class it is invested in,it has a positive alpha. Conversely, if an investment returns less thanthe asset class, it has a negative alpha. In other words, alpha is anindication of how much an investment outperforms or underperformsrelative to its benchmark index.

Commercially available stock market indices are supplied by statisticalbureaus such as Standard & Poor's (e.g., the S&P 500 Index), The FrankRussell Company of Tacoma, Wash. (e.g., the Russell 1000 Index), theFTSE Group of London, UK (e.g., the FTSE 100 Index), and the Dow Jones &Company of New York, N.Y. (e.g., the Dow Jones Industrial Average Index,i.e., DJIA). They are generally all-inclusive of the securities withintheir defined markets or market segments. In most cases, stock marketindices may include each component security in the proportion that itsmarket capitalization bears to the total market capitalization of all ofthe component securities (for examples, the S&P 500, S&P 400 MidCap, andS&P 600 SmallCap Indices). A common exception to market capitalizationweighting is equal weighting of the included securities (for example theValue Line Index or the Standard & Poor's 500 Equal Weighted StockIndex, which includes all of the stocks in the S&P 500 Index on a listbasis; each stock is given equal weighting as of a designated day eachyear) and share price weighting, in which share prices are simply addedtogether and divided by some simple divisor (for example, the Dow JonesIndustrial Average Index). Conventionally, passive investment portfoliosare built based on an index that uses market capitalization weighting,equal weighting, or share price weighting to weight the componentsecurities in the index.

A traditional passive portfolio based on a commercially available indexmay also reflect the entire market or segment the index reflects. Often,every component security making up an index is held in the passiveportfolio. Sometimes statistical modeling is used to create a portfoliothat duplicates the profile, risk characteristics, performancecharacteristics, and securities weightings of an index, without actuallyowning every security included in the index. Sometimes statisticalmodeling is used to create the index itself such that it duplicates theprofile, risk characteristics, performance characteristics, andsecurities weightings of an entire class of securities.

In accordance with some embodiments, the methods and computer softwareapplications of the presently described technology refer to commerciallyavailable indices as benchmark indices, and build custom “enhanced”indices with fundamental metrics other than market capitalizationweighting, price weighting or equal weighting. The methods and computersoftware applications of the presently described technology also useadditional filters to eliminate securities likely to reduce performancethat would be otherwise included in traditional indices.

In accordance with some embodiments, the method of the presenttechnology starts with all stocks making up an applicable commerciallyavailable stock market index, for example, a broad-based index. Examplesof indices that can be used include, but are not limited to, S&P 500Index, S&P MidCap 400 Index, S&P SmallCap 600 Index, British FTSE 100Index, French CAC 400 Index, German DAX Index, Japanese Nikkei Index,Hong Kong Hang Seng Index, S&P 1500 Index, S&P Global 1200 Index,Russell 1000 Index, Russell 3000 Index, and Russell 2000 Index.

Alternatively, in accordance with some other embodiments, the method ofthe present technology starts with constituents of another pre-selecteduniverse of securities. Such a universe of securities can be selected bya fund manager, for example.

Referring now to the FIG. 1, a securities database 11 receives input ofdata using a computing system 13 (e.g., a conventional PC computerstanding alone or connected to a server (not shown)). Computing system13 comprises at least a processor 15 and a memory 17. Memory 17 storesboth securities database 11 and a computer software application 19.Computer software application 19 comprises a plurality of instructionroutines 21, which are executed by processor 15 to carry out particularsteps in the method of the presently described technology.

Data may be manually entered into database 11 via (1) keyboard 23 whichis connected to processor 15, (2) download from an internet server (notshown), or (3) transfer from a local storage medium (not shown), forexample. The data which is input to database 11 may include, the namesof, or a representation of, the constituents forming a pre-selectedbroad-based index (i.e., the stocks forming the basis of thepre-selected stock market index) or another pre-selected universe ofsecurities.

For example, the five hundred stocks that make up the S&P 500 Index canbe used to form the data in database 11. A data entry person can makeuse of a table 25, or the like, to key-in the data using keyboard 23,i.e., data entered by keyboard 23 is obtained by processor 15 and loadedinto database 11. Table 25 includes a listing 27 of each of the 500stocks. Alternatively, the data may be downloaded into database 11 fromanother server or memory, or from a feed stream directly transmittedfrom Standard &Poor's.

As described above, the S&P 500 Index is a cap-weighted index that isbased on 500 stocks of generally Large-Cap corporations chosen formarket size, liquidity, and economic sector representation. In thisexample, the names of the 500 stocks, or their symbols, or otherrepresentative indicia, are stored in database 11 to identify a universeof securities.

In addition to the identity of the stocks, other data relating to eachstock as of the close on a selection date (e.g., the last business dayof each calendar quarter) can also be entered and stored in database 11in association with its respective stock name. Such other data may betaken from table 25, or the like, and includes growth data representedby a set of growth factors 29 and value data represented by a set ofvalue factors 31, using keyboard 23 for each stock. Again, the dataentry person may make use of Table 25 to key-in the other data so as tostore the other data in database 11, or such other data may bedownloaded to database 11.

In accordance with at least one embodiment of the present technology,the growth factors 29 that are characteristic of the stocks in database11 include, but are not limited to: (1) three month price appreciation,(2) six month price appreciation, (3) 12 month price appreciation, (4)sales-to-price ratio, (5) one year sales growth, (6) one year change inreturn on assets, (7) sustainable growth rate, (8) one year earningsgrowth, (9) one year cash flow growth, and (10) market implied earningssurprise. The value factors that are characteristic of the stocks indatabase 11 in accordance with at least one embodiment of the presenttechnology include, but are not limited to: (1) book value-to-priceratio, (2) cash flow-to-price ratio, (3) return on assets, (4) earningsto price ratio and (5) dividend yield.

“Sales-to-price ratio,” or S/P ratio, is a valuation metric for stocks.It can be calculated, for example, by dividing the company's total salesover the 12 months preceding the selection date by a company's marketcapitalization (the number of shares multiplied by the share price) asof the close on the selection date. In accordance with one embodiment,the greater a stock's S/P ratio is, the better rank that stock gets inthe ranking step of the present technology. It can be calculated,equivalently, by dividing the per-share revenue over the 12 monthspreceding the selection date by the per-share stock price as of theclose on the selection date. This calculation, may be performed byprocessor 15 using component values entered into database 11, and suchcalculated factors may be stored in database 11. Alternatively, thecalculated factors may be entered directly to the database, if they arepre-calculated by hand or machine, or are available from a dataprovider. Such pre-calculated factors are shown at 29, 31 in table 25.

“Sustainable growth rate” can be calculated, for example, by multiplyingreturn on equity (ROE) times the retention ratio (RR). ROE is calculatedas the sum of the last 4 quarters of income before extraordinary items,less preferred dividend requirements, divided by latest quarterlyreported common shareholders equity. RR is one minus the ratio ofdividends paid per share over the last four quarters divided by the sumof fully diluted earnings per share over the same period.

“One year earnings growth” is year over year change in quarterlyearnings per share.

“One year cash flow growth” is year over year change in quarterly cashflow per share.

“Market implied earnings surprise” is the percentage change in priceover a five (5) day period measured from closing price, two (2) tradingdays before the last earnings report date, to closing price, two (2)days after the report date.

“Earnings to price ratio” is the sum of fully diluted earnings per shareover the last four quarters divided by the latest closing price.

“Dividend yield” is indicated dividends per share over the next yeardivided by current share price.

“Book value-to-price ratio,” or B/P ratio is a financial ratio used tocompare a company's book value to its current market price. It can becalculated by, for example, dividing the company's total book value fromits balance sheet as of the close on the selection date by the company'smarket capitalization as of the close on the selection date. It can alsobe calculated using per-share values by dividing the company's bookvalue per share by the share price (i.e. its book value divided by theshare price) as of the close on the selection date. In accordance withone embodiment, the greater a stock's B/P ratio is, the better rank thatstock gets in the ranking step of the present technology.

“Cash flow-to-price ratio,” or CF/P ratio, is a ratio used to compare acompany's cash flow to its market value. It can be calculated bydividing the company's operating cash flow in the 12 months precedingthe selection date by the company's market capitalization as of theclose on the selection date or, equivalently, by dividing the per-shareoperating cash flow by the per share stock price. In accordance with oneembodiment, the greater a stock's CF/P ratio is, the better rank thatstock gets in the ranking step of the present technology.

“Return on assets” (ROA) shows how efficient a company's assets are ingenerating profits. As used herein, ROA over the last four quarters, forexample, can be measured by quarterly income, either before or after,extraordinary items, less preferred dividends, divided by average assetsvalue over the past four quarters. In accordance with one embodiment,the higher a stock's ROA percentage is, the better rank that stock getsin the ranking step of the present technology.

Referring again to FIG. 1, software application 19 is executed byprocessor 15 in order to carry out a program flow 100, as shown in FIG.2, in accordance with one embodiment of the present technology.

Referring to FIG. 2, in step 20 of flow 100, all stocks in securitiesdatabase 11 (e.g., the S&P 500 stocks) are given at least one numericalrank according to a set of growth and value factors. For example, eachstock is ranked from 1 to 500 for each of the ten growth factors and thefive value factors described above. A smaller number of factors may beused in Step 20. For example, the first five growth factors and thefirst three value factors may be used in one embodiment. A routine 33(FIG. 1) in software application 19 may be called by processor 15 andexecuted so as to numerically rank each stock by a separate factor. If afactor of a stock cannot be computed or used to rank the stock, thatstock is given the lowest possible ranking for that factor.

Each stock in database 11 is assigned a plurality of (e.g. five) numericgrowth factors ranks (i.e., each numeric rank is a number between 1 and500), and a plurality of (e.g., three) numeric value factors ranks(i.e., each numeric rank is a number between 1 and 500). The pluralityof assigned numeric scores for each stock are stored in database 11, byoperation of routine 33. In accordance with one embodiment, the lowerthe number, the better the ranking. This means a rank of 31 is betterthan a rank of 95, and represents a more favored stock. As will suggestitself, one can instead assign a larger number to a stock with a betterranking than to a stock with a lower ranking.

Referring again to FIG. 2, in step 30 of flow 100, each stock isassigned (1) a combined growth rank and (2) a combined value rank. Thecombined growth rank corresponds to a growth score, and is calculated bysumming up the plurality of (e.g., five) numeric growth factor ranks ofthe stock. Thus, in the example, each stock will have a combined numericgrowth rank between 5 to 2500. The growth score of each stock isdetermined by ranking each stock in the universe by its combined growthrank. The combined value rank corresponds to a numeric value score, andis calculated by summing up the plurality of (e.g., three) numeric valuefactor ranks of the stock. Thus, in the example, each stock will have acombined numeric value rank between 3 to 1500. The value score of eachstock is determined by ranking each stock in the universe by itscombined value rank.

A routine 35 (FIG. 1) in the computer software application 19 is used tocalculate the combined rankings. For example, routine 35 will obtainfrom database 11 each of the numeric ranks for a stock and add togetherthe growth rankings and add together the value rankings. Routine 35 willdo this for each stock so that each stock will have a combined numericgrowth rank in the range of from 5 to 2500, in the example, and eachstock will have a combined numeric value rank in the range of from 3 to1500, in the example. Routine 35 will store these combined rankings indatabase 11.

In accordance with some embodiments, the same routine 35 or a differentroutine (not shown) in the computer software application 19 can then usethe combined numeric growth rank to give each stock a growth score byranking each stock in the universe by its combined numeric growth rank.In addition, software application 19 can use the combined numeric valuerank to give each stock a value score by ranking each stock in theuniverse by its combined numeric value rank.

For example, five of the 500 stocks from the S&P 500 Index may end upwith the following rankings for each growth factor as shown in Table 1below. In Table 1, “3-M PA” refers to three month price appreciation;“6-M PA” refers to six month price appreciation; “12-M PA” refers to 12month price appreciation, “SPR” refers to the sales-to-price ratio; and“SG” refers to one year sales growth, of a stock as of the close on theselection date.

TABLE 1 Growth Growth Growth Growth Growth Combined Stock Stock Factor 1Factor 2 Factor 3 Factor 4 Factor 5 Growth Growth No. Name (3-M PA) (6-MPA) (12-M PA) (SPR) (SG) Rank Score  1 FII  2  21  8  7  4  42  8 . . .. . . . . . . . . . . . . . . . . . . . . . . .  50 MMC  75  79  62 100 25  341  65 . . . . . . . . . . . . . . . . . . . . . . . . . . . 100NFB 270 274 295 300 315 1454 291 . . . . . . . . . . . . . . . . . . . .. . . . . . . 300 WM 451 402 391 442 375 2472 415 . . . . . . . . . . .. . . . . . . . . . . . . . . . 500 TROW 300 214 232 218 196 1160 232

As shown in Table 1, stock FII ends up with a combined growth rank of42, which corresponds to a final growth ranking (i.e., growth score) of8 among the 500 stocks; stock MMC ends up with a combined growth rank of341, which corresponds to a final growth ranking (i.e., growth score) of65 among the 500 stocks; stock NFB ends up with a combined growth rankof 1454, which corresponds to a final growth ranking (i.e., growthscore) of 291 among the 500 stocks; stock WM ends up with a combinedgrowth rank of 2472, which corresponds to a final growth ranking (i.e.,growth score) of 415 among the 500 stocks; and stock TROW ends up withthe a combined growth rank of 1160, which corresponds to a final growthranking (i.e., growth score) of 232 among the 500 stocks.

The same five stocks may end up with the following rankings for eachvalue factor as shown in Table 2 below. In Table 2, “B/P” refers tobook-to-price value ratio; “CF/P” refers to Cash flow-to-price ratio;and “ROA” refers to return on assets, of a stock as of the close on theselection date. As shown in Table 2, in this example, stock FII ends upwith a combined value rank of 941, which corresponds to a final valueranking (i.e., value score) of 318 among the 500 stocks; stock MMC endsup with a combined value rank of 1116, which corresponds to a finalvalue ranking (i.e., value score) of 370 among the 500 stocks; stock NFBends up with a combined value rank of 899, which corresponds to a finalvalue ranking (i.e., value score) of 300 among the 500 stocks; stock WMends up with a combined value rank of 41, which corresponds to a finalvalue ranking (i.e., value score) of 15 among the 500 stocks; and stockTROW ends up with a combined value rank of 669, which corresponds to afinal value ranking (i.e., value score) of 223 among the 500 stocks.

TABLE 2 Value Value Value Stock Stock Factor 1 Factor 2 Factor 3Combined No. Name (B/P) (CF/P) (ROA) Value Rank Value Score  1 FII 302321 318 941 318 . . . . . . . . . . . . . . . . . . . . .  50 MMC 375379 362 1116  370 . . . . . . . . . . . . . . . . . . . . . 100 NFB 270334 295 899 300 . . . . . . . . . . . . . . . . . . . . . 300 WM  11  12 18  41  15 . . . . . . . . . . . . . . . . . . . . . 500 TROW 225 214230 669 223

Referring again to FIG. 2, in step 40 of flow 100, each stock in thesecurities database 11 will be assigned a selection score and a stockstyle. In this step, it is determined whether a stock is assigned itsgrowth score as its selection score or is assigned its value score asits selection score. For example, if the S&P 500 Index is thepre-selected broad-based index used to identify the universe of stocks,then the S&P 500/Citigroup Growth Index and the S&P 500/Citigroup ValueIndex are used to identify the style for each stock.

The S&P 500/Citigroup Growth Index along with its counterpart, the S&P500/Citigroup Value Index, were introduced by Standard & Poor's inDecember 2005. Previously, these indices were known as the S&P 500/BarraGrowth and Value Indices. These S&P 500/Citigroup Indices are created bydividing the S&P 500 Index based upon seven different factors, four todetermine value characteristics and three to determine growthcharacteristics. The companies are allocated to each index according totheir growth or value characteristics, with about one-third beingallocated to both the growth and value indices.

For an S&P 500 stock, if it has been classified by the S&P 500/CitigroupIndices solely as a growth or value stock, the stock is determined tohave that style and receives the numeric score for that style asdetermined in step 30 as its selection score. If, however, an S&P 500stock has been allocated to both the S&P 500/Citigroup Growth and ValueIndices, the stock receives the better of the stock's growth score andvalue score determined in step 30 as its selection score, and is treatedas belonging solely to the style associated with its better score.

Therefore, if some stocks allocated to both the S&P 500/Citigroup Growthand Value Indices (which can be referred to as blend stocks) have bettergrowth scores than their value scores (as determined in step 30), theyare determined to be growth stocks. On the other hand, those stocksallocated to both the S&P 500/Citigroup Indices and having value scoresbetter than their growth scores are determined to be value stocks.

Using the five stocks identified in Tables 1 and 2 as an example, stocksFII and MMC, for example, have been classified by the S&P 500/CitigroupIndices as growth stocks and allocated in the S&P 500/Citigroup GrowthIndex. Stocks FII and MMC will be determined as growth stocks in step40, and their growth scores of 8 and 65 will be determined as theirselection scores, respectively. Stock WM, for example, has beenclassified as a value stock and allocated in the S&P 500/Citigroup ValueIndex. WM will be determined as a value stock in step 40, and its valuescore of 15 will be determined as its selection score. Stocks NFB andTROW have been allocated to both the S&P 500/Citigroup Growth and ValueIndices. Stock NFB's growth score is 291, which is lower, and thereforebetter in this example, than its value score 300. Therefore, NFB will bedetermined as a growth stock, and its growth score 291 will bedetermined as its selection score. Stock TROW's value score is 223,which is lower, and therefore better in this example, than its growthscore 232. Therefore, TROW will be determined as a value stock, and itsvalue score 223 will be determined as its selection score. Table 3 belowsummarizes the styles and selection scores of the five stocks of thisexample.

TABLE 3 Stock Stock Selection No. Name Stock Style Score  1 FII growth 8 . . . . . . . . . . . .  50 MMC growth  65 . . . . . . . . . . . .100 NFB growth 291 . . . . . . . . . . . . 300 WM value  15 . . . . . .. . . . . . 500 TROW value 223

According to one embodiment of the present technology, stocks FII, MMC,and NFB in this example will be eligible for an enhanced growthportfolio, but not for an enhanced value portfolio. On the other hand,stocks WM and TROW will be eligible for an enhanced value portfolio, butnot for an enhanced growth portfolio. All five stocks, however, will beeligible for an enhanced portfolio based on the S&P 500 Index.

If there are no growth and/or value style indices corresponding to thestocks input into database 11, then in step 40, each stock in thesecurities database 11 can receive the better of the stock's growthscore and value score as its selection score, for example, and bedetermined to be a growth stock if its growth score is better and avalue stock if its value score is better.

A routine 37 in software application 19 will determine the style of eachstock in database 11, as explained, such a determination may be based inreference to an index classification (or to some other knownclassification) or by a comparison of each stock's growth and valuescores stored in database 11 (as the results of step 30).

Still referring to FIG. 2, in step 50, eligible stocks of a particularstyle are grouped together, and ranked according to their selectionscores as determined in step 40. For example, if the stocks are to begrouped according to value, all stocks from the S&P 500 stocks that havebeen determined to be a value stock style in step 40 are groupedtogether. Then, using the selection scores determined in step 40 allstocks in the group are ranked according to their selection scores. Foranother example, if the stocks are to be grouped according to growth,all stocks that have been determined to be a growth stock style in step40 are grouped together. Then, using their selection scores determinedin step 40, the stocks in the group are ranked according to theirselection scores. For yet another example, all 500 stocks may be placedin the group, and are ranked according to their selection scores. If twostocks, for example a value stock and a growth stock have the sameselection score, the value stock is given preference.

A software application can break ties in accordance with at least oneembodiment of the present technology, as follows: at the style level,for value stocks the tie breaker can be book-to-price value ratio andfor growth stocks the tie breaker can be 6 month appreciation. Once aselection score has been determined for a stock (based on growth scorefor growth stocks and value score for value stocks) a predeterminednumber, for example, 0.5 can be added to the selection score for thegrowth stock. This has the effect of the value stock being ranked abovethe growth stocks when both have the same score and breaks all potentialties.

A routine 39 in software application 19 will first group all stocksaccording to a particular criteria, e.g., growth, value, or both. Inaccordance with some embodiments, the stocks can be further separatedinto appropriate sectors as determined by the index provider, forexample. Then the routine 39 will rank those stocks in each group.

In step 60 of FIG. 2, a pre-determined percentage of the lowest rankingstocks (e.g., the bottom 25% of the grouped stocks) may be eliminatedfrom the stock group. A routine 41 in software application 19 can carryout step 60 by counting the number of stocks in the group, determining apercentage of that number, and then eliminating that percentageaccording to ranks.

In step 70 of FIG. 2, the remaining stocks (e.g., the top 75% of thegrouped stocks) forms a stock portfolio. In accordance with at least oneembodiment, the stocks in the portfolio are divided into a plurality ofsub-groups (e.g., quintiles) based on their rankings, and weightedaccording to the sub-groups they are in. The sub-groups with higherrankings receive more weight within the stock portfolio. In addition,stocks within each sub-group (e.g., quintile) are equally weighted. Aroutine 43 in software application can carry out step 70.

In one example, the stocks ranked in the bottom 25% of the groupedstocks are eliminated, and the remaining 75% stocks are divided intoquintiles (five sub-groups) based on their rankings from step 50, whichin turn are based on their selection scores from step 40. In thisexample, the top ranked quintile receives 5/15 (33.3%) of the portfolioweight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%),2/15 (13.3%), and 1/15 (6.7%), respectively.

If a target stock portfolio is based on a broader index that constitutestwo or more component indices, the broader index can be enhanceddirectly according to flow 100 described above to generate the targetstock portfolio. Alternatively, according to at least one embodiment ofthe present technology, each of the two or more component indices in thebroader index can be enhanced separately according to flow 100 describedabove to generate two or more portfolio components. The two or moreportfolio components can then be combined to form the target stockportfolio.

For example, the S&P 1500 core index consists of the S&P 400, 500, and600 core indices, and the S&P/Citigroup 1500 Value or Growth indexconsists of the S&P/Citigroup 500, 400, and 600 Value or Growth indices.In accordance with one embodiment of the present technology, an enhancedindex fund based on the S&P 1500 core, value, or growth index can becreated by (1) enhancing each of the component indices using the flow100 described above to generate three portfolio components; and (2)weighting the three portfolio components using the following weights:50% for the portfolio component based on S&P 500 core, value or growthindex, 30% for the portfolio component based on S&P 400 core, value orgrowth index, and 20% for the portfolio component based on S&P 600 core,value or growth index, to generate a target stock portfolio based on anenhanced S&P 1500 core, value, or growth index.

Referring to FIG. 2, in step 80, an investment vehicle such as atraditional mutual fund can be constructed based on the stock portfolioformed and weighted in step 70. Alternatively, referring again to FIG.2, in Step 80, an enhanced index can also be calculated. In accordancewith at least one embodiment, the stocks and their weights in the stockportfolio can be adjusted, rebalanced, and/or reconstitutedperiodically, for example, on the last business day of each calendarquarter. Changes can be effective, for example, at the open on thefourth business day or sixth business day of the following month.

If the existence or corporate structure of a stock in the target stockportfolio or enhanced index, as applicable, changes, the stocks andtheir weights in the stock portfolio, or enhanced index, as applicable,can be adjusted as necessary. For example, the stock of an acquiredcompany can be deleted from the stock portfolio, or enhanced index, asapplicable, at the close on the day the merger closes for both cash andstock deals. The acquired company's weight in the stock portfolio can bereallocated pro-rata among the remaining portfolio constituents, forexample. For another example, in accordance with one embodiment, thestock of a spin-off is not included in the stock portfolio, or theenhanced index, as applicable, and the value of the spin-off can bereallocated to its parent company.

The target stock portfolio generated by the method in accordance with atleast one embodiment of the present technology as described above can beused to construct different investment vehicles such as enhanced indexfunds, variable annuities, separately managed accounts, ETFs (whetherindex based or managed), unit investment trusts, etc.

One preferred family of investment vehicles to be constructed based onthe present technology is that of ETFs. As described above, ETFs are aspecial category of mutual funds. They can provide an efficient andsimple way for investors to buy and sell an entire basket of securitieswith a single transaction throughout the trading day. ETFs are builtlike a traditional mutual fund, but trade like a stock. They generallyoffer investors the advantages of lower costs and improved taxefficiency over traditional, mutual funds. The ETFs of the presenttechnology are designed to track specific indices enhanced by the methodof the present technology.

While the present technology has been described with reference tocertain embodiments, it will be understood by those skilled in the artthat various changes may be made and equivalents may be substitutedwithout departing from the scope of the invention. In addition, manymodifications may be made to adapt a particular situation or material tothe teachings of the invention without departing from its scope.Therefore, it is intended that the invention not be limited to theparticular embodiment disclosed.

What is claimed is:
 1. A computer implemented method for generating astock portfolio, comprising the steps of: (1) inputting information ofall stock that are constituents of a pre-selected universe of securitiesinto a database, wherein the information comprises identity, growthdata, and value data of a stock, as of a selection date; (2) processingdata in said database for scoring each of the stocks in said databaseusing a plurality of growth and value factors to generate a growth scoreand a value score for each stock; (3) processing data in said databasefor determining a selection score and style for each stock, wherein thestyle of each stock is either value or growth; (4) processing data insaid database for selecting eligible stocks for a target stock portfoliobased on their styles determined in step (3), wherein only value stocksare eligible for a value stock portfolio, only growth stocks areeligible for a growth stock portfolio, and all stocks are eligible for abroad-based stock portfolio; (5) processing data in said database forranking the stocks eligible for the target stock portfolio from the bestto the worst selection scores; (6) processing data in said database foreliminating a pre-determined percentage of the lowest ranking stocks;(7) processing data in said database for dividing the remaining stocksinto a plurality of sub-groups based on their rankings; and (8)processing data in said database for generating the target stockportfolio by weighting the remaining stocks according to the sub-groupsthey are in, wherein the sub-groups with higher rankings receive moreweight within the target stock portfolio, and each stock isequally-weighted within its group, wherein one or more of the abovesteps are performed by the computing system.
 2. The method of claim 1,wherein the plurality of growth factors are selected from the groupconsisting of price appreciations, sales-to-price ratio, one year salesgrowth, one year change in return on assets, sustainable growth rate,one year earnings growth, one year cash flow growth, market impliedearnings surprise; and wherein the plurality of value factors areselected from the group consisting of book value-to-price ratio, cashflow-to-price ratio, return on assets, earnings to price ratio anddividend yield.
 3. The method of claim 1, wherein the plurality ofgrowth factors are 3-month price appreciation, 6-month priceappreciation, 12-month price appreciation, sales-to-price ratio, and oneyear sales growth; wherein the plurality of value factors are bookvalue-to-price ratio, cash flow-to-price ratio, and return on assets. 4.The method of claim 1, wherein the pre-determined percentage of thelowest ranking stocks to be eliminated are the bottom 25%.
 5. The methodof claim 1, wherein the remaining stocks are divided into quintiles. 6.The method of claim 5, wherein the top ranked quintile receives 5/15(33.3%) of the weight within the portfolio with successive quintilesreceiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%), and 1/15 (6.7%), ofthe weight within the index, respectively.
 7. The method of claim 1,further comprising the step of reconstituting and rebalancing the stocksand their weights in the target stock portfolio periodically.
 8. Themethod of claim 1, wherein step (2) comprises: assigning a numericgrowth or value rank to each stock for every growth factor and everyvalue factor; summing up all growth ranks of a stock to generate anumeric combined growth rank for each stock; ranking all stocks in thepre-selected universe of securities based on their numeric combinedgrowth ranks to determine the growth score of each stock; summing up allvalue ranks of the stock to generate a numeric combined value rank foreach stock; and ranking all stocks in the pre-selected universe ofsecurities based on their numeric combined value ranks to determine thevalue score of each stock.
 9. The method of claim 1, wherein thepre-selected universe of securities is an index selected from the groupconsisting of S&P 500 Index, S&P MidCap 400 Index, S&P SmallCap 600Index, British FTSE 100 Index, French CAC 400 Index, German DAX Index,Japanese Nikkei Index, Hong Kong Hang Seng Index, S&P 1500 Index, S&PGlobal 1200 Index, Russell 1000 Index, Russell 2000 Index, and Russell3000 Index.
 10. The method of claim 1, wherein step (3) comprises:determining whether there are value and growth style classificationscorresponding to the universe of securities available; and if there arecorresponding value and growth style classifications available, a firstsegment of stocks that are classified by the corresponding growth andvalue classifications solely as growth stocks are given their growthscores as their selection scores, and they are determined to be growthstocks, a second segment of stocks that are classified by thecorresponding growth and value classifications solely as value stocksare given their value scores as their selection score, and they aredetermined to be value stocks, and a third segment of stocks that areallocated to both the growth and value classifications are given thebetter of their two scores, and determined to be value or growth stocksaccording to their better scores, if there are no corresponding valueand growth style classifications available, then each stock is given thebetter of its value and growth scores, and determined to be a value orgrowth stock according to its better score.
 11. The method of claim 10,wherein the universe of securities is S&P 500 Index and thecorresponding growth and value style classifications are S&P500/Citigroup Growth Index and S&P 500/Citigroup Value Index.
 12. Themethod of claim 11, wherein the target stock portfolio is a component ofa second target stock portfolio.
 13. The method of claim 12, wherein thesecond target stock portfolio comprises stocks selected from the stocksin S&P Composite 1500 Index, S&P Composite 1500/Citigroup Growth Index,or S&P Composite 1500/Citigroup Value Index.
 14. An investment vehicleconstructed based on the target stock portfolio generated by the methodof claim
 1. 15. The investment vehicle of claim 14 is an exchange-tradedfund.
 16. An enhanced index calculated based on the target stockportfolio generated by the method of claim
 1. 17. The enhanced index ofclaim 16 is constructed by a first party different from a second partygenerating the target stock portfolio.
 18. The enhanced index of claim17, wherein said target stock portfolio is an exchange traded fund. 19.A computer software application for generating a stock portfolio,comprising a set of instructions that when executed by the computingsystem allows the computing system and a user of the computing system toimplement the method of claim
 1. 20. The method of claim 1, wherein step(4) further comprises processing data in the database for groupingeligible securities according to their respective sectors.